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In today's blog we take a look at South Africa's economy and how far it is from full production capacity? Is South Africa's economy producing what it needs? And can it cope with demand? Or is the South African economy producing at levels below its maximum output? We take a look below.
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Is the South African economy running at full tilt?
The short answer to the question above is, NO. SA's economy is not running at nearly close to it's full capacity. In fact it is sitting with idle capacity for the first quarter of 2017 of almost 20%. That is we producing 4 units for every 5 units we can actually produce. So not exactly a sign of a very strong economy. It's clear manufacturers are feeling the pinch. The graphic below shows the average annual rate of under utilisation of South Africa's manufacturing capabilities.
From the chart above one can see there was a sharp increase in under utilisation of production capacity during 2008 and 2009. This was largely due to the fincial crises set off by the sub-prime mortage crisis in the USA which triggered the financial crises of 2008 and 2009. But to be honest South Africa's economy has never really fully recovered from this and its under utilisation of capacity has not seen the levels before the 2008 crises since. Before the crises (2004-2007) under utilisation averaged 14.7%, but after the crisis, 2010-2017 it has averaged around 18.9%, clearly showing SA's economy has never really recovered from the recession brought on by the financial crises.
So what is the cause for South Africa's under utilisation of its manufacturing capacity? In the survey on Manufacturing production, Statistics South Africa asks respondents why they are not running at full capacity. The line chart below shows the contribution the various responses makes up to the total under utilisation reported by respondents.
From the above graphic it is clear the main reason for South Africa's under utilisation of manufacturing capacity is due to a lack of demand, as reported by the manufacturers themselves. What doesnt bode well for the South African economy is the fact that there has been an increase in the under utilisation of manufacturing capacity for the first quarter of 2017, when compared to the whole of 2016. Infact the 19.2% under utilisation reported in the first quarter of 2017, is the 2nd highest level (when looking at annual under utilisation) since 2011. Add the fact that South Africa has been downgraded to "junk status" to this, it is clear that South Africa is in for tough old time. Read or write up on the impact of "junk status" on South Africa here.
Interesting to note hardly any manufacturers reported that under utilisation is due to a lack of unskilled labour (more than enough of that going around in South Africa). However under utilisation due to lack of skilled labour is far more significant according to manufacturers. In Q1:2017, only 0.2% of under utilisation was attributed to lack of unskilled labour, while 1% of it was attributed to lack of skilled labour. Thus the lack of skilled labour in South Africa was five times as significant a contributor to under utilisation of manufacturing capacity than the lack of skilled labour. Again proving the point that South Africa needs to focus on skills development and skills transfer. Employment equity for the sake of employment equity will lead to the disappearance of skilled labour and institutional know how which could take years to be regained by new employees. Thus a moderated approach to employment equity should be undertaken in order to keep staff with the skills and know how around to ensure such skills and know how is transferred to new staff members. This is the easiest and cheapest way to improve the skills set of the South African labour market. Rather this than costly training programs that might still not cover knowledge gained from years and years of experience.
Can the SA economy run at full production? The answer is to that is no. We have very restrictive labour laws, over reaching labour unions, lack of competitive advantage when it comes to cheap Chinese imports, stable and reliable power supply problems, political instability which keeps foreign investors at bay to name but a few issues holding South Africa back from achieving full production capacity and setting South Africa and a faster economic growth trajectory.